British gilt futures tumbled on Thursday, tracking losses in Bunds, while the yield differential between gilts and Bunds briefly fell into negative territory -- the first time in 2-1/2 years that gilts have been seen as a safer bet than German debt.
Euro zone debt came under heavy selling pressure for a second day after the weakest auction of German government bonds in a decade continued to rattle investors. The negative sentiment also weighed on gilts, though the losses were less severe.
At 8:37 a.m., the December gilt future was 81 ticks down at 130.29, around 30 ticks ahead of the equivalent Bund.
In the cash market, the yield on ten-year gilts was up almost 8 basis points at 2.222 percent, 5 basis points above the equivalent Bund.
But that spread was earlier 5 basis points below the equivalent Bund in early trade -- the first time since March 2009 it had entered negative territory.
Analysts said Britain was benefiting from being able to issue triple-A rated debt in its own currency, with additional support coming from the Bank of England's asset purchase programme, which it is likely to expand in the coming months.
Germany is becoming affected as contagion spreads into core European debt, the Bund auction (yesterday) was just a catalyst: it was going that way already, said Eric Wand, strategist at Lloyds Corporate Markets.
Gilts are in the fortunate position that we have a central bank that is doing quantitative easing and is showing every sign that it'll do more if the economic fundamentals carry on as they are. And with Britain being out of the euro and being a triple-A (rated debt), it's an obvious trade.
The focus for domestic investors this session with be a second estimate of third-quarter gross domestic product at 9:30 a.m., which is expected to confirm the economy expanded by 0.5 percent between July and September. The CBI publishes its latest industrial trends manufacturing survey at 12 p.m. -- an hour later than usual.